Should We Allow Retirement Funds to be Used for Real Estate Investing?

No.

That’s it, no….

Oh, still around? Let’s talk about why. But first, some background. John Crudele, a columnist for the New York Post, penned

this article —in it, he talked about how the two major political parties are not facing reality, blasé blasé..you’ve heard the drill. To note, he says:

…my belief that the only stimulus package we can afford right now is one that allows people to spend their own money.

He was on the right path. It’s good point. Then, he goes wildly off course as to what this entails:

In other words, what we need is a simple law change that will permit Americans to use their own retirement money - without being killed by taxes - for such things as buying real estate.

What? Use their retirement money to buy real estate? But you can already do that you say. Yes, but with limits. It’s used to purchase your first home, and it’s limited to $10,000. Some employers require you to roll over the money to an IRA (and you have to pay it back). But there is a reason that the government makes it very difficult to pull money out of 401(k) and IRA plans—they are made for retirement purposes. Hence, the name.

Imagine for a moment that after running up student loan debt, credit card debt, and then home-equity loan debt, Americans start tapping into their last basket of (usually) forced savings—the 401(k) or IRA plan. What happens if we as a country haven’t learned from our lesson and begin buying homes way above our means because the “attractive” intro rates? You end up in a very bad position. You end up with millions of Americans (with the help of the doom-and-gloom media) playing on the emotions of everyone to bail us out of our problems (again). Only this time, it would cost a whole lot more because we would put a lot more stress on an already-fragile Social Security and Medicare program. Basically we’d further the citizen’s dependence on the government to survive. And that’s not a good thing.

MSN to Twenty-somethings: Take Note!

So last week I posted an article on "Reckless Saving" on which I..disagreed with. There was an excellent rebuttal written by another writer for the same website which you can read here. Ok, on to today's topic.

I think it's important to re-emphasize the importance of time vs. money when you are working and investing a portion of your salary. Starting in your 20s to prepare for retirement is no new trend--I've come across many folks who plan to "retire" at 30 or 40. I don't know what they plant to do for the next 40 years after that, but that's another story that you can share in the comments section if you fall in said category.

But if you plan to slowly build up your investment income and retirement level, consider the following insight from MSN:

Imagine, for example, that you want to have $1 million by the time you retire in 40 years. That would be enough to provide an annual retirement income of $40,000 for the rest of your life.

But in fact, you’ll need $3.26 million, because if inflation averages 3 percent a year, that's how much it will take to buy what $1 million buys today. The $3.26 million should produce an annual income of $130,000 — equal to $40,000 in 2007.

I know what you're thinking--$1 Million would be plenty to live in retirement, right? I mean by then you would have paid off your home, sent the kids to college, and cut down your diet to the essentials of applesauce and medicine. (Well, maybe it won't be that bad.) However, there is some truth to the hidden tax of inflation--$1 Million went way farther in 1967 than in 2007 and rest assured that in 2047 $1 Million would get you even less.

As we've said before, it's not the money that matters. It's the time:

Start investing now and earn an average annual return of 10 percent — ambitious, but possible — and you’d have to invest about $7,400 a year to get to $3.26 million in 40 years. But if you wait 10 years to start investing you’ll have to set aside nearly $20,000 a year.

Yikes! Waiting a simple 10 years (meaning if you start at 33 rather than 23) you would have to expend three times as much money to retire with the same nest egg at the same point. (And that's over a 40-year horizon). It's tough sometimes--you get out of school and being responsible is the last thing on your mind--most feel that they will "always have money" and don't bother investing at all. Then you'll hit 30 or so and suddenly it's time to "get serious." Why wait till then?

The source of my quote above come from an informative MSN Article on advice for young investors. There's other tidbits on getting involved in mutual funds (and less on individual stocks), watching those fund fees (just get an index fund), and having the discipline to pull out of the market as it ebbs and flows. Good reading material.

I'll be traveling again, so make sure read about other blogs to the right (Face Bookers click through to see what I mean). And do me a big favor? Make sure you mention that I referred them to you. Traffic exchange and all :-)

See you soon.

The "Future" of Social Security

The "Future" of Social Security is in doubt.

So this week I wanted to explore in depth the impact of the Social Security issue. I was inspired to write this from an extension of a highly-debated article written over at Free Money Finance. You can read his excellent article in its entirety [here]. To summarize, he looked at the impact of allowing workers take a look at contributing their own money into a fund rather than having the government do it for them. Turns out that the contributor would be entering retirement with a nest egg of nearly 1 Million Dollars! It may not sound like much, but imagine having a million dollars paid to you in retirement assuming that you would've paid off your house and car!

Well, back in Reality, it probably won't happen. Social Security after all is not a retirement program, but I'm not convinced that it's even security. The program is showing signs that it's no longer sustainable, and younger workers are all quite aware that they're paying into a system in which they will see very little benefit.

To illustrate, let's look at Social Security like a pot. You and your friends contribute a portion of your money into a pot, which will be distributed to older folks who have little or no pension and are too old to work—you don't want to put the elderly on the street. The system continues, so when you get older, you get to pull from the pot while younger workers pay in, and the cycle goes on. In theory, at least.

However, you don't get out as much as you put in because there are more people retiring than entering the workforce. More people living longer, and a shrinking ratio of workers are paying in. To exacerbate things, the money distributor (the US Government) decided that the program was working so well, that they can use some of the "surplus" money to pay for other things and write IOUs.

Well, that's the problem we have today. The ratio of those putting in vs. those taking out is shrinking. So the government has tried several "solutions" to keep the system sustainable. One example: raising the age at which you can take money out, and/or lowering the amount of money you can take out. These are only temporary fixes and you can see that as people live longer it gets harder to do that. And if you are a black male, the stats say you'll die before you're eligible to receive SS funds anyway.

Which is why I don't think it's that bad of an idea to allow younger workers to take a portion of their earnings and to place it in an account of their choice to collect a higher return on the money put into the system. At the rate we are moving now, we won't have enough "government security" to ensure any person any respectable amount of money in the future. And remember—government employees are on a totally different plan than most Americans, so don't expect them to take more than a cursory interest in your future.

So, as a younger worker, I encourage you to plan for your future as if the government will stick you with the raw end of the deal. Inquire about 401(k) programs as soon as you start working and also start contributing to IRAs before you budget yourself to a point where you "can't afford" to contribute. Then, if the feds do find a good way to keep Social Security solvent, you won't be depending on that government check.